securitisation of inps credits - mef

Securitisation of INPS CreditsSecuritisation of INPS Credits

ANNEX A

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SummarySummary

• Object of the Transaction

• Description of INPS

• The Portfolio

• Historical Analysis

• The New Collection Method (Ruoli)

• Transaction Structure

• Terms of the Notes

• Sources and Uses of funds

Object of the transactionObject of the transaction

In April 1999, The Italian Treasury mandated Banca d’Intermediazione Mobiliare IMI,Morgan Stanley Dean Witter and Warburg Dillon Read, to structure an issue of bondsbacked by unpaid social security contributions. It was the first time a Europeangovernment decided to securitise so-called 'delinquent’ payments to increase currentrevenues (through a reduction of expenses)

The transaction was planned as by law as part of 1999 budget and is accounted for in the1999 public sector sources.

In February 1999, the transaction structure was also strengthened by change in the legalframework that regulates the collection of INPS’s credits changed. With effect from July1999, the collection and recovery of social security contributions in arrears is no longeradministered by INPS’s regional offices but, instead, is delegated to a system ofConcessionari (“Tax Collectors”) who have been responsible for the collection of unpaidtax receivables on behalf of other Italian administrations.

Description of INPSDescription of INPS1. The State and the social security service

The Social security service in Italy is guaranteed by Article 38 of the Constitution, which provides, interalia, for the right for any worker to receive assistance for injuries, illnesses, permanent disability, old ageand involuntary unemployment. In Italy the essential and fundamental public assistance and welfareservice is necessarily provided by the State, which uses auxiliary welfare bodies such as INPS.

2. Incorporation of INPS

INPS was created by Royal Decree No.1827 of 4 October 1935. Article 1 of such Decree specifies thatINPS is a public body with its own legal personality and autonomous management. Furthermore, Law no.88 of 9 March 1989 changed the role of INPS, which, in the context of general economic policy, fulfils thetasks assigned to it in accordance with the criteria of profitability and entrepreneurial spirit.

3. Legal nature of INPS

As INPS is a public body, it cannot go bankrupt (Article 1 of Bankruptcy Law No 267 of 1942) neither canit be placed in compulsory administrative liquidation.

INPS can only be suspended by way of a Presidential Decree

Article 38 of the Italian Constitution provides that the tasks assigned to INPS are fundamental Stateobligations and thus in the event in which INPS should cease to carry out its activity the State would carryout such tasks directly or proceed to transfer such activities and obligations to another public body.

The financial stability of INPS is in any event guaranteed by the State.

The PortfolioThe PortfolioCOMPANIES

(Aziende)

€ 31,842 Million

SELF-EMPLOYED(Artigiani e

Commercianti)

€ 9,829 Million

The above figures have been derived from provisionary lists. Finalfigures will be provided by may 2000. This will allow INPS toinclude in the pool:� Credits arisen from 31 Oct. to 31 Dec. 1999� Agriculture Area credits, not included in the provisional lists

INPS has represented the minimum amount to be € 41,671 Million

SCCI SpA (The SPV)€ 41,671 Million (31 Oct. 1999)

including Interest and Penalties

SCCI SpA (The SPV)€ 41,671 Million (31 Oct. 1999)

including Interest and Penalties

The PortfolioThe Portfolio

The assigned receivables include social security contributions which are subject to enforcement legalproceedings the ones subject to amnesty as provided by law and those subject to payment byinstalment. They relate to the following categories:

Companies

Craftsmen

Tradesmen

Agricultural sector (Autonomous workers and companies)

INPS financial statement takes into account the total amount of receivables net of all accessory sums(interest and penalty payments) as determined at the time of collection. Such accessory sums increasethe nominal value of the receivables from 35% to 60% (according to the collection phase of thecredit)

Self-employed

The PortfolioThe Portfoliobased on balance sheet data (31/12/98)based on balance sheet data (31/12/98)

Tradesmen

Center24%

North 37%

South and

Islands39%

Craftsmen

Center23%

South and Islands35%

North 42%

N

Companies

Center31%

South and

Islands28%

North 41%

Self-employed

30%

Agriculture14%

Companies56%


Companies "Aziende"

Self-employed "Autonomi"

Agriculture "Area agricola" Total

Nominal value 12,962 6,745 3,086 22,793Provision (6,822) (2,907) (1,312) (11,041)Net Book value 6,140 3,838 1,774 11,752Source: INPS Balance Sheet (€ Million)

Net face value of credits is determined through a recoverability analysis performed in thelocal offices, based on ranges provided by the Central office.

Every division applies this valuation method in a flexible way, according to the type ofcredits. This analysis is performed throughout the year.

The face value (according to 31/12/1998 Balance Sheet) is:


ADMINISTRATIVEPHASE

LEGALPHASE

STATUS OF CREDITS

AMNESTIES(Condoni)

- The administrative phase covers the period between the debt arising and it being passed onto the legal phase

- The legal phase commences once the debtor’s file is passed onto the legal department so that judicial procedures can commence

- The amnesty phase commences when the government through an act of parliament or a decree offers debtors an amnesty on interest and fines payable on non-payment. The original amount due is not reduced. Each amnesty is accompanied by a repayment plan varying according to the amnesty details

Historically, Credits recovery has been determined through three different collection phases

Historical AnalysisHistorical Analysis

Year 1998 1997 1996 1995 1994CompaniesAdministrative phase 731 559 763 822 840Legal phase 412 276 276 296 324Amnesties 447 582 956 1,153 391

1,590 1,417 1,996 2,270 1,556Self-employedAdministrative phase 53 6 7 10 14Legal phase 19 6 11 13 15Amnesties 191 384 432 607 282

262 396 451 631 312AgricultureAmnesties 41 156 254 70 naOther 2 - - - na

43 156 254 70 naTOTAL 1,895 1,969 2,701 2,972 1,868Source: INPS (€ Million)

Historical analysis has proven that many of the credits arise due to late payments and therefore arecashed and accounted for within the year of origination. For this reason credits are more likely to berepaid in the initial phase, the administrative one

The following table shows the cash flows generated from the credits recovery activity through theyears

Historical AnalysisHistorical Analysis

(%) N=1997 N=1996 N=1995 N=1994 AverageN+1 12.5 14 6.9 26.4 15N+2 - 6.8 9.6 5.3 7.2N+3 - - 10.6 3.7 7.2N+4 - - - 10.5 10.5

TOTAL 12.5 20.8 27.1 45.9 39.9

(%) N=1997 N=1996 N=1995 N=1994 AverageN+1 16.5 21.1 17.4 13.8 17.2N+2 - 1.4 0.9 1 1.1N+3 - - 1 0.4 0.7N+4 - - - 0.9 0.9

TOTAL 16.5 22.5 19.3 16.1 19.9

Recovery Rate - Companies Recovery Rate - Self-employed

The following tables indicate the average recovery rate based on a static pool analysis.

Future projections analysis is based on the methodology contained in these two tables

This analysis has not been completed for agriculture since, as stated before, only a very small amountis recovered outside the amnesty process

Amnesty ProjectionsAmnesty Projections

Year 1999 2000 2001 2002 2003 2004 2005 2006 2007Companies 111 667 667 251 168 168 168 168 28Self-employed 30 182 182 62 37 37 37 37 6Agriculture 36 71 71 71 71 71 71 71 71Total 177 920 920 384 276 276 276 276 105

Source: INPS (€ Millions)

0

100

200

300

400

500

600

700

800

900

1000

1999 2000 2001 2002 2003 2004 2005 2006 2007

AgricultureSelf-employedCompanies

• Numerous amnesties have been approved of, the most significant recent amnesties being Law 724 of 1994,Law 166 of 1996 and Law 140 of 1997

• Of these amnesties, only the Law 140 of 1997 amnesty and the recently approved Law 448 of 1998 (the latter onlyfor agriculture workers) remain outstanding and payable by debtors

• The Law 140 amnesty offered three alternative repayment plans:(i) one single instalment (ii) bi-monthly instalments over five years (30 instalments)(iii) bi-monthly instalments over ten years (60 instalments)

• The law 448 amnesty provides a repayment plan in semi-annual instalments

• INPS is able to estimate the future recovery levels as they have information relating to:amount of credits falling under the amnestynumber of applications for each repayment plan

• Given this information, expected recoveries for this amnesty are shown below:

The New Collection MethodThe New Collection Method

ISCRIZIONE A RUOLO

WHICH RECEIVABLES DOES THEMETHOD APPLY TO?

TO ALL ASSIGNED RECEIVABLESEXCEPT FOR:

- THOSE SUBJECT TO LEGAL PROCEEDINGS

- THOSE SUBJECT TO AMNESTY

- THOSE SUBJECT TO THE RIGHT TO MAKE PAYMENT BY INSTALMENTS GRANTED TO 30 NOV 99

WHAT IS THE PROCEDURE?

INPS SHALL PREPARE A RUOLO BYREGISTERING ALL CREDITS ON THERUOLO AND SUBMITTING IT TO THE

COLLECTION AGENTS (CONCESSIONARI).THE CONCESSIONARI WILL ENFORCE

THE COLLECTION OF THE CREDITSINCLUDING INTEREST AND PENALTIES

The New Collection MethodThe New Collection MethodWho are the Concessionari?They are private companies whose corporate object is the collection of receivables by way of theruolo. Generally these companies are entirely held by banks. The Concessionari are appointed by theMinistry of Finance for a renewable period of ten years and are also subject to its supervision. Theymust fulfil certain financial and management requirements. They can be revoked by the Ministry ofFinance if they fail to correctly fulfil their obligations or in the event of financial difficulties. Theyare paid a fee dependent on the amount collected. The vehicle’s liability for the concessionari fee iscapped at 2% of the amount collectedWhen will Iscrizione a Ruolo take place?Considering the volume of Ruolo to be issued (approximately 2,000,000), it has been agreed that theiscrizione a ruolo procedure shall be introduced gradually over a maximum overall period of 6months. The whole process will be completed by June 2000What are the effects of Iscrizione a Ruolo ?The Ruolo is a document which certifies the amount of receivables and other payment details. TheRuolo is a writ of execution. If the debtor fails to pay, the Concessionario may commence theenforcement procedures. Pursuant to LD 46/99, the enforcement procedure for the recovery ofreceivables has been significantly accelerated

Expected Repayment ScheduleExpected Repayment Schedule

(€ Millions) Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 TotalSeries 1 0 1550 0 0 0 0 0 1550Series 2 0 0 0 1550 0 0 0 1550Series 3 77.5 77.5 77.5 462 381 392 83 1550

Expected scenario - amortisation schedules

0

0.5

1

1.5

2

0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 5.5 6 6.5 7 7.5 8

prin

cipa

l out

stan

ding

(Eur

o B

n)

Series 1 Series 2 Series 3

Terms of the NotesTerms of the NotesSERIES 1

Amount: Euro 1.500 Million

Coupon Frequency: Semi-annual on 31 January and 31 July, long first coupon

Coupon: 6 m Euribor + Spread

Repayment: Expected Bullet at 31 January 2001Pass-through thereafter

Expected Maturity: 31 Jan 2001

Legal Maturity: 31 Jan 2002

Listing: Luxembourg traded on MTS (Italian Gvt Bonds trading platform)

Rating: AAA (Standard & Poor’s)Aaa (Moody’s)AAA (Fitch Ibca)AAA (Duff & Phelps)

Governing Law : Italy





Repayment: Expected Bullet at 31 January 2002Pass-through thereafter

Expected Maturity: 31 Jan 2002


Listing: Luxembourg traded on MTS (Italian Gvt Bonds trading platform)

Rating: AAA(Standard & Poor’s)Aaa (Moody’s)AAA(Fitch Ibca)AAA(Duff & Phelps)






Repayment: 5% of issue amount amortisation every period whilst Series 2outstanding 31 January 2002, pass-through thereafter

Expected Maturity: 31 July 2003


Average Life: 2.5 years

Listing: Luxembourgtraded on MTS (Italian Gvt Bonds trading platform)

Rating: AAA(Standard & Poor’s)Aaa (Moody’s)AAA(Fitch Ibca)AAA(Duff & Phelps)


Transaction StructureTransaction Structure

Principal and Interest

Fixe

d

Variable

SWAPCounterparty

Debt ReserveAccount

InvestorsSCCI SpA(SPV)

Concessionari Col lect ion Account

Information Flows

MonthlyTransfers

RecoveriesThrough Roles

INPS

DEBTORS

Semi-annualPayments(-15 daysCoupon)

Coupon andPrincipal Payments

(Semi-annual)

Chase BankPaying Agent

FIS SrlSPV’s

ManagementCompany

Cash Payments

Payments through

Post and Banks

Amnestiesand legal

recoveries

Payments through

Post and Banks

Daily Transfers

Deposit€ 508 mn

Bank of Italy

Bond Proceeds€ 4.65 bn

Initial Price € 4.1 bn& Deferred Price

Sale of the Portfolio

Reimbursement of error payments from INPS or

Concessionaries

Sources and Uses of FundsSources and Uses of Funds

Cash Sources

The cash sources for hedging the expenses for and reimbursement of the notes shall derive from:

i) Collections by Concessionari

ii) Amnesties and payments by instalments collected by INPS

iii) Collections from legal proceedings collected by INPS

iv) Any sums eventually paid by the Swap counterparty

Sources and Uses of FundsSources and Uses of FundsAvailable cash-flows and liquidity reserve shall be used according to the following order of priority:

1. To reimburse costs, expenses and taxes due to persons which are not parties to the Intercreditor Agreement

2. To pay costs and expenses relative to the Noteholders’ Representative, the Agent Bank, the Corporate Servicer and the Depository Bank;

3. To pay INPS (i) an amount of 2% calculated on the gross amount collected from the assigned receivables iscritti a ruolo and (ii) the management fees

4. To pay the swap counterparty the amounts due under the Hedging Agreement;

5. To pay pari passu (i) the amount due for interest accrued on the notes issued and (ii) any termination amount to the swap counterparty;

6. To pay the amounts due as principal on the notes issued on the basis of the amortisation plan shown in the Offering Circular;

7. To increase or reimburse the debt service reserve.

8. Once the notes have been repaid in full, to pay INPS any deferred purchase price

securitisation of inps credits - mef

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